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chapter 14

Terms in this set (20)

Kimberly purchased a home on January 1, year 1 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During year 1 and year 2 Kimberly made interest-only payments on this loan in the amount of $18,000 each year. On July 1, year 1, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During year 1, she made interest-only payments on this loan in the amount of $5,000 and, during year 2, she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense ($18,000 + $10,000) that Kimberly paid during year 2 may she deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?
$26,353.
Chronological method $18,000 + (10,000 × 100/125) = $26,000.
Average method $400,000/$425,000 × $28,000 = $26,353.
On March 31, year 1, Mary borrowed $200,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's year 1 deduction for her points paid?
$6,000.
$200,000 × 3% = $6,000
Harvey rents his second home. During the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income for the year?
$25,000.
When a taxpayer experiences a net loss from a nonresidence (rental property):
If the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.
Braxton owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?
Other expenses, depreciation expense, property taxes and interest expense.
Property taxes and interest expense, depreciation expense, other expenses.
Depreciation expense, other expenses, property taxes and interest expense.
*None of these statements is correct.
Other expenses, property taxes and interest expense, depreciation expense.
*The order is: Property taxes and interest expense, other expenses, depreciation expense.
On April 1, year 1, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. How much can Mary deduct in year 1 for her points paid?
$150.
$6,000/360 months × 9 months = $150.
Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any?
$0 net income. $1,000 depreciation expense carried forward to next year.
On November 1, year 1, Jamie (who is single) purchased and moved into her principal residence. In the early part of year 2, Jamie was laid off from her job. On February 1, year 2, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in year 2?
$31,250.
Maximum exclusion is $250,000 × 3/24 = $31,250.
Ilene rents her second home. During the year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in the year?
$5,000.
$5,000 [(140,000 − 100,000) × .5] = $20,000 disallowed, $5,000 allowed.
Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?
The taxpayer's principal residence and one other residence (chosen by the taxpayer).
Serena is single. She purchased her principal residence three years ago. She lived in the home until she sold it at a $300,000 gain this year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the character of the $50,000 gain she was not able to exclude?
Long-term capital gain.
A taxpayer's principal residence is a capital asset.
Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?
Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.
Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct (Jamison does not use the simplified method for determining the home office expense deduction)?
Property taxes and interest expense, other expenses, depreciation expense
Katy owns a second home. During the year, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?
Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for the year may not exceed the amount of her rental receipts (she may not report a loss from the rental property).
*All of these statements are correct.
Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.
Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.
Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?
Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.
The home does not qualify as a personal residence, therefore the interest expense allocated to personal use is not deductible.
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